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Testimony on fiscal reform

Testimony of
Robert B. Ward
Director of Research
Business Council of New York State,Inc.

Senate Democratic Task Force on
Legislative and Budgetary Reform
November 15, 2005

Thank you for inviting us to speak with you today on the important topic of fiscal reform.

Senator Krueger, we note that your votes against S. 1, the amendment that became known as the Runaway Spending Amendment, were echoed by the voters on Election Day. We were proud to join you in opposing an amendment that we believe would have made the state’s budget process significantly worse, rather than better. Senator Valesky, we know that you have made fiscal reform one of your top priorities.

The Business Council seeks now to join with you, your colleagues and other public-spirited organizations in a thoughtful, broadly based effort to develop an effective package of fiscal reforms for the state.

The voter’s overwhelming rejection of Proposal One ought to be seen as a wake-up call for Albany. The people want real reform – and they are not easily misled. The last thing Albany should do now is to pass some hasty, cobbled-together, poorly thought-out proposal with a few hand-me-down elements of that proposition. Not only would such hasty action show a lack of respect for the decision of the people – it could also kill the opportunity to develop a more comprehensive, well-thought-out package of fundamental fiscal reforms.

So we look forward to working with the members of this task force and your colleagues to give New Yorkers the more responsible, more accountable budget process they deserve.

We approach this issue with the same basic thought that drives our consideration of the many important discussions about reform that have been taking place in Albany in recent years:

Process is important, but results matter most.

What results? To answer that question, we need to identify the most important problems facing the state – for the purposes of this discussion, the most important fiscal problems.

That’s an easy call, in our view. The basic problem is that Albany refuses to live within its means. More to the point, our government refuses to live within the taxpayers’ means.

As you’re probably aware, combined state and local taxes in New York are the highest in the country. The latest Census Bureau figures show New Yorkers pay an average of more than $4,600 a year per capita in state and local taxes. That’s 48 percent above the national average. Using a more sophisticated analysis, the Federal Reserve Bank of Boston found that New York’s taxes are not only Number One in the country, but far higher than even the second- and third-place states.

Yet government in New York has an appetite for even more spending than these high tax rates can finance. So every year, we see a new budget that forecasts out-year budgets as far as the eye can see. And every year, we pile on more debt.

As Comptroller Hevesi reported earlier this year, our state debt has been rising “at an alarming rate.” Outstanding debt more than tripled from 1990 through 2004, to a total of more than $45 billion. That figure is second-highest in the country.

On average, every woman, man and child in New York – every baby born today – is burdened with more than $10,000 in debt incurred by our state, localities and school districts.

Borrowing isn’t always bad. The Business Council joined you and your colleagues in supporting this year’s Transportation Bond Act because we believe good roads, bridges and transit systems are essential. But as you know, Albany has increasingly borrowed to pay for the operating expenses of state and local governments.

Because of all the borrowing, this year’s state budget spends $4 billion on debt service. That’s more than all state-funded spending on services for those who are mentally ill, developmentally disabled, or suffering from addiction and drug abuse. It’s more than the state is spending on all criminal-justice activities, including the State Police, the prison system, services for crime victims, parole and probation, and the criminal courts. In just a few years, Comptroller Hevesi says, debt service will jump by another $2 billion -- twice the amount the state spends on parks and environmental protection.

Why are we spending so much on debt service? Again, the answer is clear: Government in New York refuses to live within its means.

So in our view, the first place to start in the search for comprehensive fiscal reform in New York is debt reform. It is the relentless use of debt that allows Albany to spend more money every year than its tax base produces. Spending more than you can afford in one year guarantees a budget gap in the years that follow – and compells still more borrowing. The cost of debt service, in turn, soaks up dollars that are sorely needed elsewhere. We simply must reform Albany’s irresponsible borrowing habits.

More than a decade ago, New York became a laughingstock among fiscal experts around the country by effectively selling a state prison to itself. Just two years ago, the Legislature took a step that was even worse, in our view. It refinanced Municipal Assistance Corporation debt from 1978 that would have been paid off in 2008, and stretched out that borrowing for decades to come. Comptroller Hevesi estimates that when the borrowing is finally repaid – assuming it is not stretched out yet again – it will have taken taxpayers 60 years to pay off costs the City of New York incurred for operational costs when Jimmy Carter was in the White House. Try explaining that to our grandchildren.

The centerpiece of real debt reform should be a Constitutional amendment that limits state-funded debt to an affordable percentage of New Yorkers’ personal income. Comptroller Hevesi proposes a limit of 5 percent, a commonly accepted guideline among public-finance experts. Because of the state’s history of irresponsible borrowing, outstanding debt is currently around 6.5 percent of personal income. The comptroller proposes a statutory limit on new borrowing that would bring the state into compliance with the 5 percent limit within 10 years. As Comptroller Hevesi says, real debt reform would force tough choices, serious planning and clear identification of priorities. In other words, it would require our government leaders to govern.

The Business Council supports these proposals as essential steps toward forcing our state government to live within its means. We urge the Legislature to give first passage to such Constitutional reforms in 2006, so that they can be on the ballot for voter consideration in 2007.

Why is Constitutional change essential? Because the Legislature and the governor have shown that simple statutory limits are not enough. The debt limitations enacted in 2000 have not prevented billions of dollars in new, irresponsible borrowing.

New limits on debt would be an important first step. But we would also urge that New York consider constitutional limits on taxes, spending, and unbalanced budgets.

More than 20 other state Constitutions require that spending reflect citizens’ ability to pay. In 1990, Governor Cuomo and the Legislature enacted a statutory limit on spending, linked to growth in personal income. Many states link spending growth to the change in population and inflation. Both approaches are worth consideration.

One basic purpose of any state constitution is to block legislative action that may be popular but is not in the citizens’ long-term interest. Political pressure on the Legislature to spend has only grown in recent decades, as those who benefit from more taxpayer spending have become more powerful and more demanding. Our resulting high taxes have driven jobs away to states where taxes and other costs are lower. Of the 234,800 jobs that New York added between 1990 and 2004, more than 60 percent were funded by the taxpayers. Private-sector job growth in Upstate New York during that period totaled barely more than 3 percent. In Ohio and Michigan, two states that are economically similar to Upstate New York, employment grew at rates more than three times those in Upstate. Our high taxes help deprive New Yorkers of the richer job opportunities available elsewhere.

A Constitutional limit on spending, perhaps with a “safety valve” allowing the Legislature to exceed the normal limit with super-majority votes in emergencies, would not eliminate spending increases. This year, for instance, a spending cap tied to inflation and population growth would allow a $2 billion increase in expenditures. But it would also virtually eliminate next year’s projected budget gap.

Real budget balance should be another goal of fiscal reform. Under the Albany status quo, the state budget is almost never truly balanced. We have reviewed Executive Budgets for the last 20 years. As you know, the governor’s budget must include a projection of spending and revenues in fiscal years to come. We could not find a single year when the Budget Division projected a balanced budget in the first "out year." And in almost every year, of course, the budget enacted by the Legislature included more spending than the governor’s – meaning that the out-year gaps were even higher than those projected in the Executive Budgets. Albany refuses to live within its means.

The state Constitution requires the governor to propose a balanced budget, but does not require the Legislature to adopt one. We believe it should. The status quo of unaffordable spending drives more one-shots, more borrowing, and more gambling – choices that often would be shunned if spending were held in check. Given the frequency of budgets that are adopted with one-shots and borrowing, we urge the Legislature and Governor Pataki to explore steps that would force two-year budget balance. Let’s put an end to planned out-year gaps in the billions of dollars.

We also urge you to consider measures that promote more accountability to the taxpayers. The Legislature requires school districts to send every resident an annual “Taxpayer Report Card” showing current and projected spending and tax levies, compared to the inflation rate. It’s a good idea for schools. It’s a good idea for Albany to require of itself, as well.

Respected New Yorkers, in and outside of state government, have made other proposals for fiscal reform. We urge the Legislature and other state leaders to conduct a detailed and thoughtful review of such proposals. We respectually suggest that organizations such as The Business Council, whose support might be important when voters are asked to decide, could be included in the review process. If such review starts now, there will be ample time to prepare Constitutional proposals for action by the Legislature in the coming session, so that second passage can occur in 2007. With no legislative action in 2006, any reforms requiring Constitutional change will likely not take effect before 2010. Thorough debate is essential. So is action.

We appreciate your jump-starting the debate on fiscal reform, and look forward to continued discussion with you and your colleagues.